Interest and Money-Time Relationships

Interest – is the amount of money paid for the use of borrowed

capital (borrower’s viewpoint) or the income produced by money
which has been loaned (lender’s viewpoint).

F=P+I
Where:
I = interest
P = principal or present worth
F = accumulated amount or future worth
Interest and Money-Time Relationships
Cash-Flow Diagrams

Cash-Flow Diagram – is a graphical representation of cash flows drawn

on a time scale.

↑ - receipt (positive cash flow or cash inflow)

↓ - disbursement (negative cash flow or cash outflow)
Interest and Money-Time Relationships
Cash-Flow Diagrams
Example: A loan of P100 at simple interest will become P150 after 5
years.

Cash flow diagram on the Cash flow diagram on the

viewpoint of the lender. viewpoint of the borrower.
Interest and Money-Time Relationships
Simple Interest
The interest earned by
the principal is computed at
the end of the investment
period.
Future Worth, F:
F=P+I
Interest earned, I:
I = Prt
Where:
P = principal or present worth
r = simple interest rate (per year)
t = time in years or fraction of a
year
Interest and Money-Time Relationships
Simple Interest

Ordinary simple interest

The interest is computed on the basis of one banker’s year
(1 banker’s year = 360 days)
I = Pr
Interest and Money-Time Relationships
Simple Interest

Exact simple interest

The interest is based on the exact number of days in a year
(ordinary year = 365 days, leap year = 366 days)
I = Pr
Interest and Money-Time Relationships
Simple Interest

Example 1:
Determine the ordinary simple interest on P 20,000 for 9
months and 10 days if the rate of interest is 12%.
Ans. P 1,866.67
Interest and Money-Time Relationships
Simple Interest

Example 2:
Determine the (a) ordinary and (b) exact simple interests on
P 100,000 for the period January 15 to June 20 2012 if
interest is 15%.
Ans. (a) P 6,458.33; (b) P 6434.43
Interest and Money-Time Relationships
Simple Interest

Example 3:
Calculate the exact interest on an investment of P 2,000.00
for a period from January 30 to September 15, 2001 if the rate
of interest is 10%.
Ans. P 124.93
Interest and Money-Time Relationships
Simple Interest

Example 4:
If P 4000 is borrowed for 75 days at 16% per annum. How
much will be due at the end of 75 days?
Ans. P 4133.33
Interest and Money-Time Relationships
Simple Interest

Example 5:
How long will it take for a deposit of P 1, 500.00 to earn P 186
if invested at the simple interest rate of 7 1/3%?
Ans. 1.6909 years
Interest and Money-Time Relationships
Simple Interest

Example 6:
If you borrow money from your friend with simple interest of
12%, find the present worth of P 20,000 at the end of 9
months.
Ans. P 18,348.62
Interest and Money-Time Relationships
Simple Interest

Example 7:
(CE Board) A deposit of P 110,000 was made for 31 days. The
net interest after deducting 20% withholding tax is P 890.36.
Find the rate of return annually.
Ans. 11.75%
Interest and Money-Time Relationships
Simple Interest

Example 8:
A man buys an electric fan from a merchant that charges
P1500.00 at the end of 90 days. The man wishes to pay cash.
What is the cash price if money is worth 10% simple interest?
Ans. P 1,463.41